2019 Review: Most Favored Hedge Fund Stocks vs. First American Financial Corp (FAF)

It has been a fantastic year for equity investors as Donald Trump pressured Federal Reserve to reduce interest rates and finalized the first leg of a trade deal with China. If you were a passive index fund investor, you had seen gains of 31% in your equity portfolio in 2019. However, if you were an active investor putting your money into hedge funds’ favorite stocks, you had seen gains of more than 41%. In this article we are going to take a look at how hedge funds feel about a stock like First American Financial Corp (NYSE:FAF) and compare its performance against hedge funds’ favorite stocks.

First American Financial Corp (NYSE:FAF) was in 35 hedge funds’ portfolios at the end of the third quarter of 2019. FAF investors should be aware of an increase in activity from the world’s largest hedge funds of late. There were 34 hedge funds in our database with FAF positions at the end of the previous quarter. Our calculations also showed that FAF isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s flagship best performing hedge funds strategy returned 91% since May 2014 and outperformed the Russell 2000 ETFs by nearly 40 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.


Cliff Asness of AQR Capital Management

We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius’ weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock already gained 20 percent. Now we’re going to take a peek at the recent hedge fund action regarding First American Financial Corp (NYSE:FAF).

Hedge fund activity in First American Financial Corp (NYSE:FAF)

At Q3’s end, a total of 35 of the hedge funds tracked by Insider Monkey were long this stock, a change of 3% from the previous quarter. By comparison, 33 hedge funds held shares or bullish call options in FAF a year ago. With hedge funds’ positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were adding to their holdings substantially (or already accumulated large positions).

Is FAF A Good Stock To Buy?

The largest stake in First American Financial Corp (NYSE:FAF) was held by Ariel Investments, which reported holding $221.7 million worth of stock at the end of September. It was followed by AQR Capital Management with a $111.1 million position. Other investors bullish on the company included Citadel Investment Group, Carlson Capital, and Fisher Asset Management. In terms of the portfolio weights assigned to each position Lunia Capital allocated the biggest weight to First American Financial Corp (NYSE:FAF), around 3.83% of its 13F portfolio. 12th Street Asset Management is also relatively very bullish on the stock, earmarking 3.48 percent of its 13F equity portfolio to FAF.

As one would reasonably expect, some big names were leading the bulls’ herd. ZWEIG DIMENNA PARTNERS, managed by Joe DiMenna, assembled the largest position in First American Financial Corp (NYSE:FAF). ZWEIG DIMENNA PARTNERS had $17.8 million invested in the company at the end of the quarter. Peter Seuss’s Prana Capital Management also made a $6.9 million investment in the stock during the quarter. The other funds with new positions in the stock are Michael Kharitonov and Jon David McAuliffe’s Voleon Capital, Michael Gelband’s ExodusPoint Capital, and Curtis Schenker and Craig Effron’s Scoggin.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as First American Financial Corp (NYSE:FAF) but similarly valued. These stocks are American Campus Communities, Inc. (NYSE:ACC), XPO Logistics Inc (NYSE:XPO), Dunkin Brands Group Inc (NASDAQ:DNKN), and GCI Liberty, Inc. (NASDAQ:GLIBA). This group of stocks’ market valuations match FAF’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ACC 19 407788 2
XPO 23 2709456 -1
DNKN 24 193861 1
GLIBA 34 2003406 -4
Average 25 1328628 -0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 25 hedge funds with bullish positions and the average amount invested in these stocks was $1329 million. That figure was $905 million in FAF’s case. GCI Liberty, Inc. (NASDAQ:GLIBA) is the most popular stock in this table. On the other hand American Campus Communities, Inc. (NYSE:ACC) is the least popular one with only 19 bullish hedge fund positions. Compared to these stocks First American Financial Corp (NYSE:FAF) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Hedge funds were also right about betting on FAF, though not to the same extent, as the stock returned 34.5% during the same period and outperformed the market as well.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

Disclosure: None. This article was originally published at Insider Monkey.